As anticipated, the Central Bank chose to restrict the Repo rate cut to 25 bps in its April 2016 policy rather than front loading a larger rate cut. In our view, the quantum of the rate cut is appropriate, in light of continuing uncertainty to the inflation trajectory posed by factors such as the upcoming monsoon and pay revision, and unfolding improvements in the transmission process following the cuts in small savings rates and implementation of the new Marginal Cost of Funds based Lending Rate (MCLR) regime by banks with effect from April 1, 2016. The continued description of the monetary policy stance as accommodative lends a modestly dovish tilt to today’s policy statement, suggesting that the RBI would reassess the space for further easing once the risks to the inflation outlook recede. Nevertheless, it is premature to gauge whether further space for monetary easing will materialize as the fiscal year progresses. We continue to expect growth of GVA at basic prices to improve to 7.7% in 2016-17.

The overarching focus on smoothing systemic liquidity is a positive development, which should support the transmission process. The halving of the policy rate corridor and the change in stance on maintaining systemic liquidity closer to a neutral position rather than a deficit would also aid in softening interest rates, at least in the short term.